ASK THE EDD ATTORNEY – HOW TO AVOID MAKING MAJOR MISTAKES DURING YOUR EDD AUDIT PROCESS – PART 1
By Robert S. Schriebman
November 20, 2015
When you have represented clients before the EDD, for over a quarter of a century, in the areas of employee versus independent contractor issues, as well as issues relating to payroll tax compliance, you see and learn a great deal. Over the years I have seen well-intentioned business owners, attorneys and CPAs, who are not experienced in dealing with EDD employment and payroll matters, make fundamental and serious mistakes that result in an economic catastrophe. In this series of articles I will present several major blunders caused by inexperience, or the mistake of believing that the “tax man is your friend.”
Before getting into specific problem areas there is one overall mistake that may be the biggest mistake of them all: failing to get experienced professional advice before walking into an EDD audit. This error is not limited to the business owner alone. Inexperienced lawyers and accountants fail to pick up the phone and talk to the voice of experience before representing a client before the EDD.
Another fundamental error is the failure of the business owner to retain a licensed, experienced professional to represent them before the EDD. The EDD does not have standards of admission to practice that are in place within the IRS and the FTB. Literally anyone can represent a business owner in an EDD audit. Some of these individuals have no professional objective qualifications such as a CPA certificate, or a license issued by the State Bar of California. Not too long ago a “basket case” matter came into my office. The business owner was represented by a former “Human Resources” (HR) individual. Everything that could have gone wrong had gone wrong. The fees involved to undo this disaster were significant. Choose your representative wisely.
Major Mistakes Made During An EDD Audit
Not responding timely to an initial EDD audit notice. Whether it is an IRS, FTB, or EDD audit notice, it generates a great deal of stress. Some people handle this type of stress in denial. They bury the audit notice in a stack of papers on the desk and pretend it doesn’t exist. This can lead to a negative first impression with the assigned EDD auditor. Most EDD auditors are reasonable people and will give you additional time to consult with a professional advisor or to gather up documentation. However, if you do not communicate with your EDD auditor, he or she can issue a subpoena duces tecum to compel your presence and your documentation.
A potential problem with the failure to timely respond is the risk of an EDD Estimated Notice of Assessment. The EDD does have internal information and databases that are shared with the IRS. An estimated assessment cannot be settled and may have to be brought before an Administrative Law Judge (ALJ) for resolution at a substantial cost in attorney’s fees that would not be necessary if prompt attention were given to the EDD notice.
Stalling the production of information and documentation. A tax audit is not a game of “hide the ball.” The EDD is entitled to examine relevant books and records relating to many things such as: worker status, fringe benefits, and the accuracy of internal records when compared to issued W2s and 1099s. There is always going to be a level of tension between what the EDD auditor believes he or she is entitled to examine and issues of relevancy and the burden to the business owner in the production of those records.
Over the years, I have found that cooperation in the examination process leads to the best results. If you fail to cooperate you create a negative impression not just with the EDD but with the ALJ who may hear your case. Judges do not like to hear that the taxpayer or a representative has been uncooperative.
The lack of cooperation can also lead to the assessment of penalties that may not otherwise have been assessed in the mutual spirit of cooperation.
Giving the EDD auditor too much documentation and information. When you are initially notified of a pending EDD audit, you will be given a standardized list of the documentation that the EDD would like to examine. Anyone can ask for whatever they want, but whether or not they are legally entitled to obtain the requested documentation and information may be an entirely different matter. Please review the several articles on my website that discuss what documentation is required to be given to the EDD. There is no doubt that the EDD is trying to expand its traditional scope of examination by requesting documentation that was not requested in the past.
Only a knowledgeable and experienced EDD representative can determine what the EDD is entitled to examine. There are many judgment calls involved in most sophisticated tax audits. Sometimes documentation is given in exchange for concessions by the auditor or management. It is never a good idea to give any auditor anything and everything requested. I have seen inexperienced attorneys and CPAs “cooperate” their client into the ground with devastating economic consequences.
Failing to respond to an EDD Proposed Notice of Assessment. Before the EDD issues a final Notice of Assessment, it issues a Proposed Notice Assessment (PNA). The PNA may be an opportunity to meet and to confer with the examining auditor and his or her manager. Unfortunately all too many EDD audits are conducted by auditors with heavy case loads. These people just want to get your matter off their desks. I often hear remarks by employers and their representatives who come to me after the audit is over. All too often they lament that the EDD auditor had made up his or her mind early on what the eventual outcome of the audit will be – all 1099 recipients are going to be reclassified as common law employees. It seems that the EDD had made up its mind early-on and did not want to be confused by the facts.
Fumbling the ball – not responding to the final Notice of Assessment (NA). When the EDD issues its Final Notice of Assessment (NA) it is pretty much done with the examination process. If you don’t like the results of the NA you must be proactive. This means that you must timely file a Petition with the CUIAB to protect your rights. If you fail to timely file the Petition, the assessment becomes final and is turned over to an EDD collector.
Inexperienced people, including attorneys and CPAs, make the mistake of calling the auditor after the receipt of the NA and voicing their objections. They tell me that the auditor responded by saying like, “I’ll take a second look at this and get back to you.” This lulls one into a false sense of security. Nothing is heard from the auditor. The time to file a Petition has expired and the collector is on the other end of the line. Forget about what the auditor told you after the NA that was issued. No one is going to take a second look at anything. Don’t fumble the ball and don’t blow your appeal rights!
Don’t be like the fellow above who buried the audit notice under a stack of papers on his desk. A Notice of Assessment is a “hot potato” and must be given your immediate attention.
This concludes Part 1 of this 2 Part article. In Part 2 we will discuss other major mistakes made during both the audit and the collection processes.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
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